Best way to offset unexpected large W-2 Income?

[Ernest Fox]

This year, the company I was working for was acquired. As a part of the acquisition, all my stock options were accelerated and paid out as cash through payroll. This payment will leave me with about $600,000 in W-2 income for 2024. While researching my options to reduce my 2024 tax burden (already maxed the 401k and HSA), I see that it is possible to buy an investment property, use it for Short Term Rentals and as long as certain conditions are met, I can accelerate the depreciation which can be used as an offset to W-2 income. This seems like an ideal situation, as I was already considering the idea of a vacation rental property. This is all new to me, so I have a few questions:

• -I see that the depreciation expense will depend on the completion of a cost segregation study. Are there certain types of properties that I should target and/or avoid for a better outcome when it comes to the cost segregation study….Large Condo Assoc/Small Condo Assoc/townhouse/SFH?
• -Should I put the property under an LLC (pay higher mortgage rate, but better protection against lawsuits) or keep under my name?
• -I believe that I will need to self-manage the property through something like Airbnb/vacasa/vrbo in order to meet the “Material Participation” threshold? Any suggestions on what platform might be best?
• - I live in Maryland, any suggestions on what markets might be best for STR and about 150k to invest?
• - I realize that this maneuver will likely increase the risk of audit....curious to get a sense of how much more risk of audit I will face and does the IRS typically just audit the one year or would they dig into previous years as well?
• Any other legal options to help offset my W-2 income other than a STR?

Thanks in advance.

[Alyson Gordon]

• You're definitely on the right track. Here's my 2 cents from my experience but i'm not an attorney or CPA so it would be good to ask one :)
• 1. I'd buy a SFH or something with little/low land value would be best. You'll want to buy a property with a high enough value to really get the benefit of the cost seg. I'd estimate 12-15% of the sales price as you'll have to back out land value and then you'll get closer to 20% of actual home as a deduction (assuming 100% bonus depreciation which the jury is still out on that being extended.
• 2. I think yes to the LLC but you can do that after you purchase. it makes things unnecessarily complicated IMO for the purchase process. If you don't keep your money separate the LLC won't be protected anyway so be sure to set up your bank accounts properly before you operate the STR.
• 3. Yes, you need to self manage. I would get a PMS (Property Management System) or channel manager that allows you to list on all platforms but manage in an integrated way as if you have 1 platform. Something like Hospitable, Owner Rez or Guesty. 
• 4. I'm not familiar enough with the best markets in MD however I'd definitely try to stay in state if you can. If not, you'll have to file + pay taxes out of state and also if you're using a CPA they charge extra. As I read your question, your goal is to avoid taxes and keep your $ not spend it :)

• 5. I'm not sure about the audit but if you're doing things the right way you should be ok.
• 6. I'm not aware of any other real-estate related options, and outside of having a business of some sort to have write-offs, I only know of the traditional things like maxing out retirement contributions and such.  

hope that helps and good luck!